BMI View: Current estimates given suggest that Saudi crude oil production in the first half of 2013 has fallen year-on-year. We attribute this fall to a weaker global demand rather than capacity problems faced by Saudi Arabia, which has the world's largest spare capacity. We highlight that soft export demand and strong domestic consumption growth will see the latter become the key driver of long-term Saudi crude oil production.
According to a report with Saudi newspaper Al-Riyadh Arabia citing Saudi economist Fahad bin Juma Saudi delivered nearly 1.27bn barrels (bbl) of oil to the world market - or about 7.01mn barrels per day (b/d) - and consumed about 419mn bbl of oil domestically - or 2.31mn b/d - in the first half of 2013 . He did not however disclose the basis or sources of these estimates. This suggests that total production for the first half of the year stood at 9.3mn b/d , a figure that largely corroborates with OPEC's 9.4mn b/d for Saudi Arabia for the first five months of 2013.
Comparing H113 production and consumption figures with the equivalent period in 2012 , total oil production appears to have fallen about 6% year-on-year (y-o-y) even as consumption rose 12.7% y-o-y. Lower domestic output and higher domestic consumption has reduced exports by 11% y-o-y. This would have implications on revenues accruable to Riyadh from oil exports.
|End Of The Boom|
|Share Of Exports And Consumption In Total Saudi Production (mn b/d)|
This production fall is less a reflection of Saudi's falling production capacity as it is a decision made in light of slowing global demand. As the country with the largest spare capacity in the world, Saudi output is able to respond quickly to changes in supply and demand in the global oil market. In 2012, it capitalised on the loss of Iranian crude to raise its output to record levels , in order to meet global demand in a high oil price environment; indeed, OPEC basket price of crude hit a historical high of US$109.50/bbl in 2012.
However, the situation has become less favourable in the first half of 2013. Not only is Saudi facing increased competition from other OPEC producers, most prominently Iraq, pressure on OPEC to control the cartel's supply to the market is growing in face of weaker oil prices. Starting from mid-April, disappointing macroeconomic data from Europe and China, in conjunction with fears that the US would end its monetary easing policy, have seen the OPEC crude price fall below US $100/bbl - the price level which Riyadh had stated it was 'comfortable' with, in view of its creeping domestic spending needs.
|Weaker Price Support For Production|
|Average OPEC Basket Price For The Period January To June (US$/bbl)|
With world demand likely to remain weak in the second half of the year, unlike in 2012, soft prices and poor export growth prospects will mean that the global sector will not be the driver of crude oil production growth in Saudi Arabia. This is particularly so given our Country Risk team's bearish outlook of the Chinese economy, and given that Saudi is the source of about 20% of China's crude oil requirement. Moreover, a continued boom in US oil production will limit the kingdom's export gains in the US crude oil market.
|Chinese Blues To Dampen Export Demand|
|Saudi's Share Of Chinese Oil Imports, 2009 and 2012|
Indeed, our forecast for a slight fall in Saudi output reflects this bearish sentiment on the global crude oil market in 2013. We expect production to fall from a high of 11.72mn b/d in 2012 to 11.36mn b/d in 2013. Despite this fall, we highlight that this will still be the second-highest level of output in the past two decades, with domestic consumption as the key growth driver.
|Domestic Needs Spurring Production On|
|Saudi Oil Production, Consumption & Net Exports, 2000-2022 ('000b/d)|
As Saudi Arabia continues into its summer season, monthly oil consumption is expected to rise in July and August as more crude oil is burned to generate the power needed for air-conditioning. This would most likely push the average consumption for 2013 up to 2.86mn b/d, from the current average of 2.04mn b/d for H113. In the longer-term, strong growth in the transportation, power, petrochemical and construction sector, supported by a generous fuel subsidy scheme, would continue to support oil demand growth in Saudi Arabia. This will in turn see the domestic market take the driving seat of Saudi crude oil growth, instead of the export market.
|Economic Growth Pushes Oil Consumption Up (I)|
|Forecasts Of Vehicle Fleet (LHS, mn units) And Oil-Based Power Generation Growth (RHS, TWh)|
|Economic Growth Pushes Consumption Up (II)|
|Construction Industry Value, US$bn|
The downside risk to our consumption forecast comes from an improvement in energy efficiency in the country, and a success in developing its gas resources so that they may be used to meet domestic energy needs and leave oil available for the export market. An upward adjustment in domestic oil prices could also slow consumption gains, though this move could receive much political backlash in the kingdom.